Only the Patient Prosper

Question: My portfolio didn't do much last year. I am getting discouraged. I am still not back to where I was in 2000 and I am not sure how much longer I can hold on. Am I foolish to just keep hanging on?

Answer: The stock market is heartless, isn't it?

If an investor had put $10,000 in the S&P 500 on the first day of January 2000, she would still be "under water" in her investment, having about $9,300 by the end of 2005. Six long years and still about 7% down from where she started.

It is times like this that make me recall my number one rule of investing: never invest money unless you have to. There are no iron clad guarantees when you invest money and you might end up six years down the road with nothing to show for it.

But I never recall my first rule of investing without recalling my second: most people can't afford not to invest. I know, Mrs. Lawrence, it's a double negative. But sometimes you just gotta...

Most of us want to create a growing stream of income for our retirement years, something that will keep up with the rising cost of living. Saving alone will not get the job done for most of us. We have to take the risk of investing to have any hope of accomplishing that goal.

One reason some give up on their investments is the "surprise factor." Many have heard that the stock market has averaged about 10% over the long term. True enough, but if I have one foot in a pot of boiling water and the other foot on a block of ice, on average, I ought to be comfortable.

The reality is that the stock market may average ten percent, but it rarely grows at that rate in any given year.

Very generally, the history of the stock market shows that out of any given five year period, one year will be down (the market will lose money), one year will be meager (the market will grow between 1 and 10 percent) and three out of the five years, the market will grow over 10 percent. And one of those above 10 percent years will be above 30%.

There are certainly exceptions to that five year generality, but historically, the farther the market moves away from the average, the more likely it is to move back toward the average. So when the market was up five years in a row in the late 1990s, averaging above 28 percent a year, it was only a matter of time. The following five years (2000 - 2004) averaged -2.3 percent annually.

What happens when you put both periods together? You get about a 12 percent return. Add last year's lackluster performance to the mix and it cuts the average back to about 11.4%

What does all that say about this upcoming year? I have no idea. But keep the following in mind:

1. Fortune telling is mighty difficult. If you try to figure out when the market is going to "get healthy" again, you'll miss the train. It will pull out of the station without you.

2. Available alternatives are pretty meager. I never thought I'd see a time when people got excited to see 4% bank CD rates, but here we are. But after inflation and taxes, that doesn't leave a whole lot of result for the long term goal of creating a growing stream of income.

3. Investor fatigue can be very costly. Some investors just give up on waiting for the market to yield its hoped for results and cash out…often just before the harvest. Again, if they were cashing out for a better long-term alternative, bully for them. But too often they simply cash out because they are tired of worrying. But temporary pain relief (cashing out of the market) may bring on long-term pain (the near certain loss of purchasing power due to inflation).

4. The future is still very bright. Nothing has changed for the worse and much has changed for the better. The American economy is robust and growing. Better still, more and more of the world is turning to capitalism. The prospects for growth in the domestic and world economies, and eventually their equity markets, is brighter than ever.

But only the patient will prosper. Be patient.